Rational Reasons

Wednesday, June 25, 2008

Why I can't support the "Green Shift"

I like the premise, I really do - make polluters and C02 emitters internalize the cost of their actions, rather than externalize that cost for the rest of us.

Prima facie, it seems like a sound idea. Stephane Dion and the Liberals are proposing using the tax system to push those external costs onto polluters while trying to remove the public cost. It is costed, planned and well thought out.

The problem is, of course, it won't work. It runs counter not only to sound economics, but counter to human economic behaviour. The plan, as with most attempts by the government to regulate and engineer the economy and society, holds within it the seeds of "unintended consequences" which will have absolutely paradoxical effects - it may cause more pollution and Co2 emissions than it stops.

The problem is the regulation and taxation may destroy the normal "moral sentiment" and give polluters the ability to merely pay for permission to pollute.

As Ronald Bailey points out at Reason in a review of the work of Samuel Bowles, it comes down to both insentive AND our inate sense of what is right. The example given is the Israeli Daycare fines case. In that case, 6 daycare centres in Haifa implemented fines for parents who picked up their kids late. But rather than encouraging parents to be more prompt, it had the exact opposite effect:

Instead, parents reacted to the fine by coming even later. Why? According to Bowles: "The fine seems to have undermined the parents' sense of ethical obligation to avoid inconveniencing the teachers and led them to think of lateness as just another commodity they could purchase."

That is, parents felt they could just purchase the ability to be late as a comodity. Extrapolate this to the directors of heavy polluters and C02 emmiters - they can merely purchase, through taxes and fines, the ability to pollute with out having to justify or explain it in the more moral sense - to the public anxious to see something done.

The Green Shift can be seen as allowing polluters to buy the ability to pollute with impunity. Given that Bowles research is based on 41 behaviour economics experiments around the world and he comes to this conclusion:

"[I]ndividuals from the more market-oriented societies were also more fair-minded in that they made more generous offers to their experimental partners and more often chose to receive nothing rather than accept an unfair offer. A plausible explanation is that this kind of fair-mindedness is essential to the exchange process and that in market-oriented societies individuals engaging in mutually beneficial exchanges with strangers represent models of successful behavior who are then copied by others."

Or as Bailey puts it "as people gain more experience with markets, morals and material incentives pull together."

Given this research, and the research in behavioural economics previously cited in my post on Michael Shermer's "Mind of the Market", I believe that the entire scheme runs contrary to human behaviour in the market. It will not work.

There is another problem as well. I could not find where the Liberals would end the years of subsidies to the oil and gas industry, the most polluting and C02 emitting industry in Canada. As I stated nearly 18 months ago, the federal government provides about $1.4 billion in subsidies, totalling over 8 billion between 1990 and 2003. Add 5 more years to that and its up over $10 billion. Under Dion and the Liberals when they were in government, that is $2 for subsidies to pollution industries for every $1 in environmental funds.

I don't see in the Green Shift where this is fixed or addressed. Rather, we have one market distorting factor being used to try to offset another market distorting factor. That's like taking Quaaludes to counteract all the Amphetamines you just took - it would be better to lay off the pills altogether.

A better solution would be one that followed not just the climate science, but the science of economics and human behaviour. One where the public as well as the industries are forced, as CD Howe Institute President Bill Robson said, by incentive to change :

"If you seriously want to reduce greenhouse gas emissions the consumer has to feel pain,"

A plan that would have worked, in my opinion, would have been one that meant less government, not more:

End monopolies on power generation and subsidies for the industry. The biggest polluters are provincial government owned electricity utilities. How about lowering the barrier to entry so that power needs can be satisfied by multiple means and sources - wind, solar, nuclear, hydro etc, where reasonable - and decentralized.

All of this, and more, working in concert with normal, human economic behaviour, would work to reduce greenhouse gases and pollution without distorting government interference, allowing our "morals and material incentives [to] pull together."

I will give Stephane Dion credit though. He has, at least, presented a policy and a plan of action to do something rather than nothing, or actively undermining environmental efforts, as the Conservative government is doing. The Green Shift should be argued on its merits, and on its merits, I do not think it will work.

Rather than taxes and top down enforcement, bottom up, self-organizing, voluntary behaviour will be what works in the long term.

"[P]aying taxes does produce a neural reward. But we're showing that the neural reward is even higher when you have voluntary giving."

Let's base an effort to reduce C02 and pollution on that assumption, rather than running contrary to human nature.

Edit: fixed link and added power generation to the less government list.